Fire and Its Aftermath

May a condominium unit-owner maintain a suit against the board of managers for failing to restore in a quick and proper manner the apartment after a fire? That was the issue in Katz v. Board of Managers. The action arose from property damage caused to a condominium unit.

Plaintiff Laurie Katz was the owner of condominium unit 15A/B located in the building known as One Union Square East Condominium. The defendant was the board of managers of the condominium. It was undisputed that on October 6, 2003, an electrical fire occurred at the unit, through no fault of plaintiff or defendant. The damage that resulted was declared a “total loss” by both parties’ insurance carriers. The apartment was uninhabitable.

The condominium’s bylaws provided that the condominium was responsible to “arrange for the prompt repair and restoration” of the unit. The condominium’s insurance covered the cost of cleaning and completely restoring the unit. Plaintiff’s policy covered her personal property and improvements as well as the cost of alternate living expenses for the reasonable period of time it took to make the unit habitable.

Plaintiff did not return to the unit after the fire. She claimed that the unit remained uninhabitable. She paid all common charges, additional fees and homeowners’ insurance. She claimed that the condominium failed to restore the unit in a timely and workmanlike manner. She sought damages for breach of the bylaws; constructive eviction; breach of the implied warranty of habitability; and breach of the implied covenant of good faith and fair dealing.

The board of managers claimed that it acted properly, consistent with the bylaws and that it fulfilled its duties to plaintiff. It claimed that plaintiff was solely responsible for delaying the completion of the repairs. By affidavit, the board asserted that shortly after the fire it promptly arranged for contractors to provide bids, but that this process was stalled and delayed by plaintiff because she refused to provide access to the unit unless she was given notice and was present. The board also alleged that plaintiff refused to sign a restoration agreement, that she was difficult to communicate with, and that she spent an inordinate amount of time negotiating the costs of certain improvements. The board provided a time line of the attempts it made to restore the unit.

According to the board, on or about January 11, 2007, plaintiff was notified that the unit was ready for inspection and possession. Plaintiff maintained that she inspected the apartment in March, that it was incomplete and that there was no kitchen. The board claimed that, ten months later, plaintiff attended a final walkthrough, after which plaintiff submitted a further list of items to restore and repair. The board claimed it exercised its best efforts to accommodate plaintiff’s additional requests.

Both parties moved for summary judgment. The court explained that on a motion for summary judgment, the moving party had the initial burden of setting forth evidentiary facts to prove that it was entitled to judgment, without a trial. If the movant met this burden, then the burden shifted to the opposing party who had to establish the existence of material facts through evidentiary proof in admissible form, that would require a trial of the issues. If the one making the motion failed to make out its case, then its motion would be denied regardless of the sufficiency of the opposing papers.

The court explained that granting a motion for summary judgment was the functional equivalent of a trial. As a result, it was a drastic remedy that should not be granted where there is any doubt as to the existence of a triable issue. The court’s function was limited to issue finding, not issue determination.

The board argued that the second and third causes of action – breach of the warranty of habitability and constructive eviction – had to be dismissed as a matter of law because they did not apply to the relationship between a condominium and its unit-owner. The court agreed and explained that condominium unit-owners were not protected by the warranty of habitability, since they did not hold a lease for the premises but rather possessed a fee ownership interest. The court found that the condominium was also entitled to summary judgment on the claim for constructive eviction because, again, the parties did not stand in a landlord/tenant relationship. The court dismissed the second and third causes of action.

Plaintiff’s first cause of action asserted that the defendants breached the bylaws by “failing to properly insure that the repair of plaintiff’s unit was completed in a timely fashion and workmanlike manner.” The court reviewed the bylaws, which stated: “In the event that the building or any part thereof is damaged or destroyed by fire...the Residential Board...shall arrange for the prompt repair and restoration thereof (including each Unit, but excluding fixtures, furniture, furnishing or other personal property not constituting a part of such Unit).”

A condominium’s bylaws constitute a contract with the unit owners. The court discussed two fundamental principles of contract construction. Agreements were to be construed in accordance with the parties’ intent and the best evidence of what the parties intend was what they provided in their writing. As the court explained, a written agreement which was complete, clear and unambiguous has to be enforced according to the plain meaning of its terms.

Decisions made by a board of managers were reviewed according to the Business Judgment Rule. Courts were required to defer to the good faith decisions made by a board of managers. To trigger judicial inquiry, a unit-owner had to show that the board acted outside the scope of its authority, in a way that did not legitimately further the entity’s purpose and in bad faith.

Plaintiff failed to demonstrate any of the three elements that would trigger judicial scrutiny of the condominium’s actions. Rather, the evidence showed that the board arranged for repairs of the apartment and paid the contractor from the insurance proceeds. Plaintiff failed to demonstrate that any of the alleged delays in effecting these repairs were the result of bad faith on the condominium’s part in executing its obligations under the bylaws. The court could not substitute its judgment for that of the board’s since the record showed that the board acted for the purposes of the condominium, within the scope of its authority, and in good faith.

As to the quality of the work performed, the board maintained that since the fire, it had performed all of the repairs necessary to make the unit habitable. In support of its position, the board provided numerous photographs, as well as the affidavit of its agent and also of the president and owner of the contracting firm that had performed the repair work. In contrast, the only evidence plaintiff submitted concerned the present condition of the unit. She submitted her own affidavit, a memorandum from an environmental specialist (that was unsigned and not sworn and thus not in admissible form) and correspondence between the parties and plaintiff’s insurance company regarding a water leak which occurred five years after the fire.

Plaintiff’s affidavits were conclusive concerning the present condition of the apartment. The only items which were specifically identified by plaintiff as requiring further remedy were the windows and HVAC units, which plaintiff maintained were required to be replaced. Yet, plaintiff failed to establish that the board violated the bylaws by failing to replace the items, or was otherwise required to perform the repairs. The court found that plaintiff’s documentation concerning the 2008 leak was irrelevant. Based on these submissions, the court found that the board was entitled to summary judgment dismissing the first cause of action for breach of the bylaws.

As to the fourth cause of action, for breach of the implied covenant of good faith and fair dealing, the court rejected the board’s argument that such a breach could create a cause of action independent from breach of the bylaws (i.e., breach of contract). The court found that while the implied covenant did not create new duties under a contract, such a claim could remain even though a breach of contract claim did not otherwise exist. In such a situation, plaintiff would have had to show that the board exercised its contractual right malevolently, for its own gain and as part of a purposeful scheme designed to deprive plaintiff of the benefit of the contract. Since plaintiff failed to establish that the board acted in bad faith, the board was entitled to summary judgment dismissing this claim as well.

Comment: The court recognized the long-standing principle that a condominium board cannot be liable for breach of the warranty of habitability or constructive eviction because both require the existence of a landlord-tenant relationship, which is not present between a condominium and its unit-owners.

The court also interpreted the bylaws, and the board’s actions thereunder, in the context of the Business Judgment Rule. The court explained the well-settled law that the bylaws form a contract between the condominium board and its unit-owners and determined that, because the board acted within its business judgment when carrying out its contractual obligations, it could not be liable for breach of the bylaws.

Finally, the court considered a cause of action for breach of the covenant of good faith and fair dealing, which asserted that the board did not act fairly or in good faith when performing its obligations under the bylaws. Such a requirement – to act fairly and in good faith – is an implicit requirement in every contract. Although claims under this cause of action have been asserted for years in general contract matters, we are seeing them asserted more frequently in cases involving cooperatives and condominiums. As this court explained, however, once a determination has been made that the board acted in good faith so as to defeat a breach of the Business Judgment Rule, it is highly unlikely that a board will be found to have breached the covenant of good faith and fair dealing.

Attorneys
For Plaintiff: Kenneth J. Glassman
For Defendants: Smith Mazure Director & Wilkin